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Dr. Ellen Wald: Saudi Arabia Changing, Aramco Likely to Go Public in 2019

Wed, May 2, 2018 - 2:40pm

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With the price of oil nearing $70 a barrel and potentially heading higher, what are the consequences for the global economy and especially one country that stands to gain from higher oil prices: Saudi Arabia.

Dr. Ellen Wald, an expert on the Middle East and the author of Saudi Inc., explains why oil prices at current levels are not a threat and how this ties into Saudi Arabia's larger plans.

Oil and the Global Economy

When oil hit almost $150 in 2008, it was too much for the world economy. Now, with prices projected to push as high as $80, many are wondering if something similar will play out.

There are several things we need to consider, however, including the factors pushing up oil prices, Dr. Wald noted. Most especially Venezuelan oil production has completely fallen apart. Also, though it’s still producing a lot of oil, Saudi Arabia isn't at maximum oil productive capacity, and other oil-producing countries are not producing at their fullest either.

We’re also heading into the seasonal period that generally sees oil prices rising with summer around the corner. Add on top of these factors the reality that geopolitical tensions are rising, and it isn’t any wonder oil prices are rising with them. 

“That being said, we could be seeing oil prices going up, but $70 or $80 is not $120 a barrel,” Wald said. “We now have this incredibly dynamic industry we'd like to call the shale oil industry in the United States that is going to continue producing oil no matter what. … We may see even more oil production in the United States counteract these rising prices. We may, in fact, find a sweet spot for the price of oil that is good for both the Saudis and for the world economy.”

Aramco IPO and a Changing Saudi Arabia

Aramco Headquarters in Dhahran, Saudi Arabia (Source: Wikipedia)

Some analysts are projecting an IPO valuation for Saudi Arabia’s Aramco near $2 trillion, with some believing that a higher oil price will further stoke this figure. While oil price is one component of the IPO valuation, Wald noted, there are many other factors that go into Aramco’s valuation.

Aramco has far greater reserves than any other oil company, she noted, and it has a vast refinery network, as well as an incredible research center. It’s expanding its downstream network into more refining and petrochemicals as well.

It will ultimately come down to what the banks value Aramco at, she said, but it's still going to be the largest IPO to date.

The Saudis are seeking to make Aramco public for several reasons. They’re looking at the long-term picture, Wald noted. Aramco isn’t really a national oil company, she added, and it currently acts more like an international oil company with investments all around the world.

To that end, Wald sees an IPO in the cards for 2019. Anything sooner is probably unlikely, because it takes a while to prepare an exchange for an IPO, particularly of this size, and banks are more likely to have cash available in that timeframe than at the end of 2018.

“The idea is that Aramco is a strong company, it makes a lot of money, it makes a lot of value and profit for shareholders,” Wald said. “This is something that the Saudis feel that they can also profit off of in the long run.”

Saudis Changing with the Times

When Saudi Arabia implemented production caps in an attempt to force U.S. shale players out of the market, the move backfired and forced these companies to become more efficient, by some reports lowering their production costs to below $20 a barrel.

“When shale oil companies say they can make money off of $20 a barrel oil, most of them are lying,” Wald said. “When you look at the money it really takes to produce a barrel of shale oil, they’re discounting a lot of what goes into that.”

But overall the production landscape has already shifted. For the Saudi royal family and Prince Mohammed Bin Salman, the issue of Saudi Arabia running out of oil is at the forefront of the changes being made with Aramco. Salman is driving to diversify the Saudi economy, in the interest of producing more jobs for Saudis and weening the populace off of government assistance.

To that end, Saudi Arabia is trying to attract business to the country and make it easier to set up shop there, with new bankruptcy laws and a business-friendly atmosphere. Saudi Arabia is also changing socially, Wald noted, with a shift away from clerical control towards the royal family, and toward increased liberalization and Western influence. 

“Laws aimed at normalizing business will definitely bring the Saudi economy and Saudi business climate more into line with the rest of the world,” Wald said. “They want to have a diverse economy. They want people to invest in Saudi Arabia. No one wants to invest in a country where you might get blown up. … I think that Saudi Arabia, in particular, wants to be seen as a leader in moving towards secularism or at least it moving towards a more open society.”

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